The combined challenges of improving service quality, becoming more customer-focused and delivering Gershon efficiency savings are placing considerable financial pressures on local authorities. But it is not easy for today’s finance managers to get to grips with all the financial options open to them, assess their merits and weigh up the cost implications. The prudential code allows councils to escape the constraints of annual expenditure limits and, within certain rules of prudence, borrow capital externally. The expectation was that councils would take advantage of a wide and varied suite of financial tools, including leasing. But, shortly after the code’s introduction, it became evident that low-cost loans offered by the Public Works Loan Board (PWLB) were ‘crowding out’ other sources of capital finance, often to the detriment of delivering the most efficient form of financing. As time has gone on, I would argue that the code is now producing a more balanced view of where capital expenditure powers should be exercised, and where leasing arrangements – with properly-negotiated and transparent contracts – are the ‘best value’ option. For instance, removal of the financing cap is felt to have mainly affected large projects with substantial payback in efficiencies some years hence. In other words, ‘spend to save’ projects, where the capital investment would pay for itself through savings over, say, a 10 year-plus period, were where the greatest volumes of borrowed cash would be applied. In effect, finance managers are using the PWLB for long-term infrastructure investment that will appreciate or add value – new schools and multi-storey car parks, and using leasing for those assets which depreciate – plant and vehicles. Leasing remains the most attractive option for assets where reliable residual values (RV) can be calculated and realised. It is generally recognised that leasing allows local authorities to avoid equipment obsolescence, and free up funds to invest elsewhere. If you purchase depreciating assets outright, it’s not only a drain on available budgets, but can also leave councils with outdated equipment that has no value, and the headache of finding the funding to replace it. A particular advantage of leasing is that it helps managers keep track of their assets more effectively, rather than losing control of an ageing asset base. Ironically, option appraisals, the tool to help councils develop a value-for-money solution, are not encouraging councils to look at all the options properly. The ability to borrow capital over 25-year periods at base rate or lower has meant that councils are simply looking at a high level financial comparison. As a result, they are not accurately evaluating the intangible costs as well, in a whole life cost comparison, and in some cases, not ‘match-funding’ borrowing to asset lifespan. The reason for our insight is that on a number of occasions, Siemens has even been asked by advisers, on behalf of councils, to help them properly consider asset finance within option appraisals. This experience provided an interesting insight into current practice and especially, how councils cost the transfer of risk benefit inherent in a lease transaction. I noticed that it is often assumed within option appraisals that if the council is using capital, it will often assume it will be able to secure the same residual value for the asset in question as the lessor. This is rarely the case. As a business-critical skill, a whole-life cost lessor has an in-house team of specialist asset managers who are tasked to achieve the maximum return on the asset through a wide network of disposal routes across multiple markets. It is unrealistic to think that an authority, even with a dedicated person such as a fleet manager, would be able to achieve the same resale values. In summary, the prudential code and the PWLB facility have brought much-needed freedom to councils, and enable a greater mix of financial management techniques. But I would say that too few authorities are making the most of the financial flexibility afforded by this freedom, and may be missing opportunities to really drive best value from their funding choices. Third-party finance providers certainly have an educational role in helping councils understand how leasing, and loans, are best applied to achieve maximum benefit for the authority. w David Martin is head of public sector at Siemens Financial Services
